Jigar M. Patel
International Tax Attorney
Sections 69, 69A and 69B of the Income-tax Act deal with tax treatment of unexplained investments, money, bullion, jewellery and valuables of a taxpayer. The provisions therein empower tax authorities to treat the value of such assets, the nature and source of acquisition of which the taxpayer is not able to satisfactorily explain, as his deemed income for that financial year,
Dire Tax Implications of the Deeming Provisions
When the deeming income provisions of the aforesaid sections come into play, the same can result in serious tax consequences. Under Section 115BBE, such deemed income is taxed at a flat rate of 60%, added by a surcharge of 25% on such tax and capped with a 4% cess. This works out to a tax burden of 78% and with penalty u/s. 271AAC, the effective liability on the taxpayer can mount up to 84% of the addition made by way of deemed income.
Distinct Burden of Proof on AO & Taxpayer
Under the deeming income provisions, the burden of proof is shared, with distinct responsibilities of both the Assessing Officer (AO) and the taxpayer.
The primary burden lies with the AO to establish the foundational facts for invoking the provisions in relation to unexplained investments, money or valuables. The AO must first prove, with material evidence, that:
- The taxpayer has actually made an investment or is found to be the owner of any money or valuables.
- Such investments or assets have not been recorded in the books of accounts, if so maintained by the taxpayer. In case of such unrecorded investments or assets, the AO should ask the taxpayer to explain the nature and source of acquisition of the same.
Once the AO has established these initial facts, the burden then shifts to the taxpayer, who is then required to:
- Offer an explanation about the nature and source of acquisition of such investments or assets.
- Provide supporting evidence and documentation (e.g., bank statements, income declarations, loan confirmations, gift deeds etc.) to prove the genuineness and reasonableness of the same.
Mere suspicion or conjecture cannot justify an addition
It is important to bear in mind that an addition under the aforesaid sections cannot be based on mere suspicion or conjecture. It has been judicially well settled that the mere fact that the taxpayer could not provide a satisfactory explanation for the source of investment cannot lead to the presumption that it was his income. The tax authorities must have some cogent material or credible evidence to treat the investment or asset as unexplained in the hands of the taxpayer and tax the same as his deemed income.
Uncorroborated Third-Party Evidence whether justified?
There have been instances, where in during a search or survey at a third-party’s place some information in regard to the taxpayer is detected. Can an AO make additions to the income of a taxpayer, just placing mechanical reliance on loose sheet notings, WhatsApp chats or some recorded voice conversations discovered during such search or survey?
Tribunals and Courts have repeatedly stressed on the necessity of independent corroboration of such third-party evidences, holding that mere mechanical additions placing blind reliance on such material or seeking to draw adverse inferences against the taxpayer on a mere presumptive basis cannot be sustained.
